Equity Loan / Line of Credit
An equity loan / line of credit is a mortgage placed on real estate in exchange for cash to the borrower. Equity loans generally have a fixed rate and a fixed payment. An equity line of credit is a revolving credit based on the equity of your property.
For example, if a person owns a home worth $100,000, but does not currently have a lien on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for a lien on title placed by the lender of the equity loan. A standard equity loan is also called a second mortgage.
Some home equity lines of credit allow the possibility to redraw cash up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term.
The two major advantages of borrowing with a home equity loan are lower interest rates and potential tax savings. The interest on credit cards and other types of personal loans are generally not tax-deductible. Thus, common uses of an equity loan / equity line of credit include debt consolidation (paying off high-interest credit card debt), home improvements, purchasing or refinancing a home, purchasing land, paying for educational expenses and other luxury items.